Ice Dammed If You Do, Ice Dammed If You Don’t

Michael Duonocore | Property Insurance Coverage Law Blog | February 8, 2019

This time of year, the northeast of the United States starts to feel insufferably cold, followed up by winter storms which can dump anywhere from an inch to three feet of snow at a time. The snow can be a welcomed arrival in winter as it brings snow days, sleigh riding and joy. It can also signal the beginning of a damming experience; ice damming that is.

You see, ice damming is a term for when snow on your roof starts to melt from either heat building up in your attic, the ambient temperature, or the sun. As the snow melts it slides down your roof and towards your gutters. However, the buildup of snow on the roof and in the gutter prevents the water from properly draining. Then as the sun fades and the temperatures drop again, all that water stuck around your gutters freezes, creating an ice dam. Now while an ice dam may look nice with its icicles hanging there glistening in the sun, it is causing a disaster to your roofing system.

As the ice dam phenomenon sits atop your roof, it can lead to roof leaks, ceiling collapses, and frozen and/or burst pipes. However, most notably, it leads to significant damage to your roofing shingles and gutters. As the water and snow melt and refreeze repeatedly, it expands and contracts the roofing shingles and moves your gutters off their original position. This can cause heavy and extensive damage to your home.

So, what do you do when you see ice damming on your roof? Well besides saying “ice dammit” there isn’t much you can do. Trying to chip the ice away will cause your shingles to break or become damaged. If you are lucky, it will get warm enough to melt the ice and snow and drain over and eventually out of your gutters. However, if you are unlucky, you simply must sit there and wait until spring.

If you notice damage either to your roofing system or interior of your home, make sure you contact your insurance agency. If you need further assistance, it is always a good idea to contact a licensed public adjuster to help navigate the insurance claims process.

Developer’s Failure to Plead Amount of Damages in Cross-Complaint Fatal to Direct Action Against Subcontractor’s Insurers Based on Default Judgment

Christopher Kendrick and Valerie A. Moore | Haight Brown and Bonesteel LLP | January 7, 2019

In Yu v. Liberty Surplus Ins. Corp. (No. G054522, filed 12/11/18), a California appeals court held that a developer’s failure to allege the amounts of damages sought in its cross-complaint rendered default judgments against a subcontractor void and, therefore, unenforceable against the subcontractor’s insurers in a direct action under Insurance Code section 11580(b)(2).

Yu, the owner, hired ATMI to develop a hotel. ATMI subcontracted with Fitch to perform stucco and paint work. Yu sued ATMI for construction defects and the developer cross-complained against its subcontractors, including Fitch, for breach of contract; warranty; indemnity, etc. Yu’s operative complaint prayed for damages “in an amount not less than $10,000,000, according to proof.” ATMI’s cross-complaint stated that it incorporated the allegations of Yu’s complaint “for identification and informational purposes only,” but “does not admit the truth of any allegations contained therein.” The cross-complaint also prayed for damages with respect to the various causes of action “in an amount according to proof.”

Fitch defaulted. ATMI then settled with Yu, including an assignment of rights against Fitch. Yu proceeded to prove up a default judgment against Fitch for $1.2 million, which was entered by the court.

Fitch’s insurers moved to vacate the judgment, arguing that ATMI had not stated an amount of damages in the cross-complaint sufficient to support a default judgment. That motion was denied on the ground that the insurers lacked standing to contest the validity of the default judgment. In an unpublished opinion the appeals court affirmed, while telling the insurers that they had an alternative remedy of denying any demand for payment and litigating the issue in a coverage action.

Yu then sued the insurers as a judgment creditor in a direct action under Insurance Code section 11580(b)(2). But the court in that action entered summary judgment for the insurers, ruling that the default judgment was void on its face because of the absence of a money demand in the cross-complaint.

The appeals court agreed. The court first pointed out that under Code of Civil Procedure section 425.10(a) in any complaint or cross-complaint “[i]f the recovery of money or damages is demanded, the amount demanded shall be stated.” The court cited exceptions to the general rule in cases involving personal injury or wrongful death, or when the plaintiff is seeking punitive damages. (Citing Code Civ. Proc., §§ 425.10(b); 425.11.) And in those cases, the plaintiff must still serve a separate written statement of damages (citing Code Civ. Proc., §§ 425.11 (compensatory damages), and 425.115 (punitive damages), before a default judgment may be taken. (Code Civ. Proc., §425.11(c).)

The Yu court explained that it is a matter of due process that the defendant must have notice of the specific relief sought, so that he or she can decide whether to appear and defend. Further, the Legislature has provided that a default judgment cannot exceed the amount demanded, or it is void. (Code Civ. Proc., §§ 580, 585; Greenup v. Rodman (1986) 42 Cal.3d 822, 826.)

There was no question that the developer’s cross-complaint failed to meet the requirements, but the Yu court also held that the allegation incorporating the underlying complaint by reference would not suffice either. The Yu court noted that neither statutes nor court rules establish any formal requirements for incorporation by reference, but common law contract principles require that: “(1) the reference to another document [be] clear and unequivocal; (2) the reference [be] called to the attention of the other party, who consented to that term; and (3) the terms of the incorporated documents [be] known or easily available to the contracting parties.” (Citing Kleveland v. Chicago Title Ins. Co. (2006) 141 Cal.App.4th 761, 765.)

After first pointing out that the alleged incorporation by reference was expressly “for identification and informational purposes only,” the Yu court then found the complaint’s allegation of damages “not less than $10 million” to be inconsistent with the cross-complaint’s allegation of damages “in an amount precisely unknown,” and “subject to proof.” Consequently, the incorporation by reference was not “clear and unequivocal,” nor was the precise amount “adequately called to the attention of the other party.” The Yu court ultimately faulted the developer for having failed to state any amounts in the cross-complaint:

“[W]e agree with the trial court’s assessment that ‘because the cross-complaint filed by ATMI specifically declined to state the amount of damages sought . . . , it seems contradictory to basic notions of due process and fairness to find that cross-defendants [the Fitch Entities] have been put on notice of their potential damages by virtue of an allegation in a complaint filed not against them, but against cross-complainant ATMI.’”

Finally, the Yu court rejected an argument that Fitch had entered a general appearance, saying this went to the issue of service or jurisdiction, but not the amount of damages required for a default judgment. Likewise, the Yu court rejected an argument that Fitch could have readily calculated the damages because it had performed the work, saying that was no substitute for adequate notice or due process.

Property Damage Is Not Necessarily Physical In Calif.

Catherine L. Doyle and Jan A. Larson | Jenner & Block LLP | December 10, 2018

In a recent decision, Thee Sombrero Inc. v. Scottsdale Insurance Company, a California appellate court ruled against insurers seeking to limit coverage for loss of use damages related to an ownership interest in tangible property. The appellate court held that the “loss of use” need not be a loss of all possible uses of the property and recognized that the loss of a particular use was sufficient to constitute the required property damage. In addition, the appellate court authorized the use of economic loss calculations as an appropriate measure of this covered property damage. In so holding, the appellate court challenged the reasoning of other opinions in a sister state and elsewhere in California, and its detailed analyses of the more insurer-friendly holdings may provide persuasive support for policyholders facing similar issues throughout the country. We suggest that policyholders facing similar situations familiarize themselves with this opinion when advocating for coverage for loss of a particular use of tangible property, resulting in economic losses.

A unanimous panel of the Court of Appeals for the Fourth District of California recently issued an opinion construing a commercial general liability policy’s coverage for property damage as extending to economic losses stemming from a loss of use of that property for a particular purpose. In Thee Sombrero Inc. v. Scottsdale Insurance Company, a judgment creditor of the policyholder brought suit against the policyholder’s liability insurer to recover the loss of value that resulted from the revocation of a municipal permit to operate a nightclub. The insurer sought to circumvent coverage by contending that the loss of a permit was merely the loss of an intangible right, and that the plaintiff had only suffered economic damages. The insurer argued the plaintiff’s claims therefore fell outside of the scope of the liability policy’s coverage for property damages. In ruling in favor of coverage, the appellate court undertook a rigorous analysis that refuted the insurer’s arguments and distinguished contrary authority that had taken a more insurer-friendly position.

Thee Sombrero Inc. owned commercial property in Colton, California. Sombrero also possessed a conditional use permit, or CUP, issued by the city, which authorized the operation of a nightclub on the premises. In 2007, Sombrero leased the property to lessees who ran a nightclub under the CUP. Among other conditions, the CUP required city approval of the property’s floorplan and mandated that the approved floorplan could not be modified without further city approval. The city inspected the property in connection with the lease and approved the floorplan, which included a single entrance to the nightclub, equipped with a metal detector.

Crime Enforcement Services was hired to provide security services for the nightclub. Unknown to Sombrero at the time, CES converted a storage area on the property into a “VIP entrance” without a metal detector. On June 4, 2007, a fatal shooting occurred inside the nightclub. Sombrero subsequently learned about the “VIP entrance,” and the owner of CES admitted that the gun used in the shooting had entered the club via this unauthorized second entrance.

As a result of the shooting at the nightclub, the city revoked the CUP. Sombrero negotiated with the city and secured a modified CUP, allowing for use of the property as a banquet hall instead of a nightclub. However, this restricted use as a banquet hall was less lucrative than the prior use as a nightclub.

In 2009, Sombrero sued CES for breach of contract and negligence, alleging that CES did not frisk the shooter and that CES’s failure to screen the shooter led to the shooting, which in turn caused the revocation of the original CUP. The loss of the CUP “lower[ed] the resale and rental value of the [p]roperty” and caused “lost income,” since renting the property as a nightclub had been more profitable than renting it as a banquet hall. Sombrero sought damages against CES for “the reduction in fair market value of the [p]roperty” and “lost income.” The president of Sombrero attested that the difference in value of the property under the original CUP versus the modified CUP was $923,078. In 2012, the court entered a default judgment against CES for the $923,078 of lost value.

CES had a general liability policy issued by Scottsdale Insurance Company, which covered CES’s liability for “property damage” caused by an occurrence. The policy defined “property damage” as either “[p]hysical injury to tangible property, including all resulting loss of use of that property,” or “[l]oss of use of tangible property that is not physically injured.” As a judgment creditor of CES, Sombrero initiated a direct action against Scottsdale in 2015 seeking coverage for the loss of use, expressed as the $923,078 in economic losses, caused by CES.

Scottsdale moved for summary judgment, arguing that the revocation of the original CUP was not a loss of use of tangible property. Rather, according to Scottsdale, the loss of the original CUP was merely the loss of an intangible right to use the property in a particular way. Scottsdale further asserted that property damage, as contemplated by the policy, did not include economic loss. Sombrero responded that it lost the use of tangible property because of the revocation of the original CUP and argued that the economic loss resulting from the loss of use of tangible property did constitute property damage covered by the policy. The trial court agreed with Scottsdale and granted the motion for summary judgment in 2016. In its order, the trial court held, “[l]ost value is economic loss, but economic loss is not lost use of tangible property.”

Sombrero appealed, reiterating its argument that the loss of use of the property resulting from the revocation of the original CUP constituted “loss of use of tangible property that is not physically injured.” The appellate court noted that the interpretation of an insurance policy is a question of law subject to de novo review under settled rules of contract interpretation. Among those well-settled rules of interpreting insurance contracts, the appellate court construes ambiguous language to protect the objectively reasonable expectations of the policyholder.

At the outset of its analysis, the appellate court declared that it “defies common sense to argue” that Sombrero’s loss of its ability to use its property as a nightclub is not, by definition, a loss of use of tangible property. The appellate court then dispatched conflicting authority, including a Washington appellate court decision also involving Scottsdale with “strikingly similar” facts. In Scottsdale Insurance Co. v. Int’l Protective Agency, the dispute centered on the loss of a restaurant’s liquor permit caused by the negligence of Scottsdale’s policyholder, a security company that permitted a minor to enter the restaurant. The opinion in IPA did not persuade the appellate court in Thee Sombrero to abandon its “common-sense position.” In the view of the appellate court, the coverage analysis properly focused on the loss of use of property that results from the loss of an entitlement and not the loss of the intangible entitlement itself. Although a permit or license is not tangible property itself, its loss means the owner of the property can no longer use that property in a particular way. Furthermore, the reasonable expectations of the policyholder would construe “loss of use” to include the loss of any significant use of the property, not merely the total loss of all possible uses. Finally, the appellate court parted ways, in dictum, with the IPA court’s assertion that a right to occupy premises is not a tangible property interest. To the contrary, at least under California law, a lease is considered a conveyance of an estate in real property. Moreover, regardless of the technical legal contours, a policyholder would understand “tangible property” in an insurance policy to include leased real property. In any event, the appellate court determined that Sombrero, as the owner of the property at issue, plainly owned an interest in tangible property.

Having disposed of Scottsdale’s argument that Sombrero had only lost an intangible right to use its property in a particular way, the appellate court went on to address other points of disagreement with the trial court’s ruling. The trial court had granted summary judgment for Scottsdale under the rationale that a “mere economic loss” is not property damage. Generally speaking, strictly economic losses — such as lost profits, loss of an investment, loss of goodwill or loss of an anticipated benefit of a bargain — will not constitute tangible property damage as contemplated by a commercial general liability policy. However, where the intangible economic losses provide a measure of damages to tangible property that is covered by the policy, the policy will provide coverage for those damages. In other words, loss of economic value is an appropriate method of measurement to calculate property damage in the commercial general liability policy context. The diminution of property value is not merely economic loss but damages sustained because of property damage. Therefore, the appellate court articulated that the correct principle is not that economic losses can never constitute property damage; rather, only losses that are exclusively economic and that lack any accompanying physical damage or loss of use of tangible property are not property damage. Under this principle, Sombrero suffered a loss of use of tangible property under the policy. Further, the loss of value was a proper measure of those damages. Sombrero’s use of the diminution of value calculation to measure its damages did not provide an escape hatch for Scottsdale to avoid coverage.

The appellate court also dispensed with other precedent offered by Scottsdale. Referring back to the policy language, “[l]oss of use of tangible property that is not physically injured,” the appellate court distinguished a California Supreme Court case that sided with an insurer on claims based on the loss of an easement, which was not itself tangible property, and resulting in loss in value but no physical damage to the injured party’s property. The appellate court also distinguished a 2007 decision from the Second District appellate court involving a case brought by a lessee against its landlord for the landlord’s failure to maintain the property in the condition in which the landlord had contracted to maintain it, as this amounted to a breach of contract claim over leasehold interests and not the loss of use of tangible property.[4] Although the appellate court in Thee Sombrero again expressed doubt, in dictum, over the expressed proposition in the Golden Eagle opinion that leasehold interests are not tangible property, it relied upon Sombrero’s status as property owner to hold that its claim for diminution of value or its ownership interest constituted a claim for loss of tangible property.

Since the appellate court ruled in favor of Sombrero on grounds that the loss of the original CUP was anchored to the covered loss of use of tangible property and was properly measured by the loss of value economic damages, the court declined to address alternative arguments raised by Sombrero. Questions of whether the loss of the original CUP itself constituted a loss of use of tangible property and whether the construction of the unauthorized VIP entrance constituted physical damage to tangible property (arguably not an “occurrence,” defined as an “accident” by the policy) were thus reserved for another day.

The appellate court’s opinion in Thee Sombrero underscores the benefit to policyholders of express policy language that encompasses the loss of use of tangible property that has not sustained physical damage. We recommend policyholders review their commercial general liability policy provisions, including the definitions, and consider the appellate court’s analysis in Thee Sombrero when evaluating whether their policy may extend to claimed loss of use damages, even where property is not physically damaged. Policyholders may find persuasive support in the methodical examination of the practical, “common sense” connection between the loss of a right to use tangible property and the covered loss of use of such property. The opinion also provides an analytical foundation for the applicability of economic losses as the correct measure of the property damages. The strongest support may be for property owners above lessees in Thee Sombrero, although the appellate court articulated certain reservations that suggest it may be persuaded by future arguments regarding similar loss of use claims made by lessees, as well.

California Court Finds Coverage When “Property Damage” Doesn’t Require Physical Injury By Definition

Tamara Boeck | Ahead of Schedule | November 7, 2018

Although it may seem strange at first, the recent ruling by the California Fourth Appellate District Court in Thee Sombrero, Inc. v. Scottsdale Co., (2018 EL 5292072), holding that an insurer must pay for a claim where there was no actual physical property damage, is not as odd as it may seem to non-insurance coverage lawyers.  The reason?  It all depends on the policy language and the definition of “Property Damage” where there is an “occurrence.”

The underlying facts are noteworthy in that there was no dispute that the plaintiff-claimant, Thee Sombrero, Inc. (Sombrero), lost revenue and the value of its real estate (diminished value) when the security company it hired to provide security guards failed to keep guns out of Sombrero’s nightclub.  A fatal shooting due to that alleged negligence (“an occurrence”) resulted in a lost ability by Sombrero to operate its property as a nightclub.  That specific loss of use totaled almost a million dollars in diminished value of the Sombrero property.  Sombrero sued the security company for the lost value, and the security company defaulted.  Sombrero then pursued the security company’s insurer, Scottsdale, under California Insurance Code section 11580, which allows a prevailing claimant to file a direct action against the insurer for coverage under the applicable insurance policy.

Scottsdale filed a motion for summary judgment not long after the section 11580 action was filed against it, arguing that the loss of the “use permit” for a nightclub was not lost use of tangible property, but merely the loss of an intangible right to use property in a certain way, and really economic loss that is not covered as property damage under the policy. The trial court agreed.  Sombrero appealed and argued in essence that “[t]he loss of the ability to use the property as a nightclub is, by definition, a ‘loss of use’ of ‘tangible property.’” To which the appellate court commented, “It defies common sense to argue otherwise.”  At the same time, however, the appellate court identified contrary authority involving Scottsdale (albeit in Washington State) that was “strikingly similar” to the present case, yet distinguished the prior Scottsdale decision on three grounds:  1) the focus should be on the loss of use of the tangible property that results from the loss of the entitlement, not just the entitlement, 2) the loss is not defined in the policy as requiring a “total loss” and therefore under normal interpretation standards “any significant use” lost would be within the reasonable expectation of the insured for coverage, and 3) acknowledging that a leasehold of a specific type of property is an actual property right, and the loss of such use of a property right is therefore a loss of use of tangible property.   In stating the “correct principal,” the appellate court held that “losses that are exclusively economic, without any accompanying physical damage or loss of use of tangible property, do not constitute property damage.”  Here, because the Scottsdale policy “expressly defined property damage as including” ‘[l]oss of use of tangible property that is not physically injured,” the appellate court disregarded the distinguishable California cases with differing policy language under consideration.

While this case did not arise out of a construction defect dispute, the points of insurance coverage may be applicable in a future construction defect context where there has been an “occurrence” but no physical injury to the property, only a valuable loss of use of that property.  Of course, it will always depend on the specific language of the insurance policy, which is why it is so important to understand the insurance policies and potential for coverage in any dispute.

Insurer Must Defend Insured Against Construction Defect Claims

Tred R. Eyerly | Insurance Law Hawaii | October 4, 2018

Finding various exclusions inapplicable, the Federal District Court ruled that the insurer owed a defense to the general contractor based upon Texas law. Mt. Hawley Ins. Co. v. Slay Engineering, 2018 U.S. Dist. LEXIS 139363 (W.D. Texas Aug. 15, 2018).

Huser Construction had a CGL policy issued by Mt. Hawley Insurance Company. Huser contracted to design and construct a municipal sports complex with the City of Jourdanton. The project consisted of four baseball fields, a softball field, parking lots and swimming pool. Huser subcontracted with Cody Pools, Inc. to design and build the swimming pool. Huser also subcontracted with Q-Haul, Inc. to perform earth work, grading and storm drainage work at the site.

After substantial completion of the project, a Huser employee noticed cracks in the pool and parking lot paving. Cody Pool began repair work, but the problem was not cured. The City later notified Huser of several alleged deficiencies involving the swimming pool structure, asphalt paving, concrete flatwork and curbing, and overall drainage. When repairs were not performed to the satisfaction of the City, it sued Huser alleging breach of contract and negligence.

Huser notified Mt. Hawley. Coverage was denied based on certain exclusions. Mt. Hawley then filed suit seeking a judgment that it had no duty to defend or indemnify Huser. Mt. Hawley relied upon the Your Work Exclusion which precluded coverage for “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.” The policy further stated that the exclusion did not apply “if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.” The policy included a separate endorsement that excluded coverage arising out of a breach of “express or implied contract, breach of express or implied warranty . . . regarding the formation, terms or performance of a contract.”

The parties both moved for summary judgment. The court rejected Mt. Hawley’s argument on the breach of contract exclusion. Merely because Huser may ultimately be liable for certain of the City’s economic losses under a breach of contract theory did not mean that all of the alleged property damage was causally attributable to Huser’s alleged breach of its contract with the City. The fact that all claims contained in the underlying suit have some relation to Huser’s contract with the city or that Huser was sued for breach of contract were not enough to trigger the exclusion. To accept Mt. Hawley’s argument, the facts alleged in the underlying suit would have to demonstrate that there were no other independent, coverage (non-excluded) “but for” caused of the alleged property damage.

The underlying suit alleged that “work performed by [Huser], its subcontractors and suppliers, was defective.” Therefore, the underlying suit alleged that entities other than Huser were responsible for the allegedly defective work and the resulting damage. Accordingly, the allegations left open the possibility that the property damage may have occurred even in the absence of a breach of contract or implied duty by Huser.

Mt. Hawley argued that the subcontractor exception to the Your Work Exclusion was irrelevant because it was overridden by the endorsement containing the Breach of Contract Exclusion. But it was not natural to interpret the Breach of Contract Exclusion to encompass all work incidentally related to the project regardless of the party that performed the work or the capacity in which it did so. The court rejected the sweeping interpretation asserted by Mt. Hawley and instead found that the policy should be interpreted such that the subcontractor exception to the Your Work Exclusion still had meaning. Therefore, Mt. Hawley had a duty to defend.

Mt. Hawley’s motion as to the duty to indemnify was also denied because it was premature to determine whether it had such a duty.